Why the UK has failed to produce a tech giant
HIGH hopes are pinned on Britain’s IT and software sector in the drive to rebalance our economy and restore the country to prosperity. But the industry enters the New Year with one big question looming: can our home-grown companies survive the year without succumbing to a foreign predator?
There has been a run of recent takeovers, with software group Misys falling to San Francisco private equity house Vista while Logica, inventor of the text message, was taken over by Canadian firm CGI.
The biggest deal of all was the sale in October 2011 of British software miracle Autonomy to US giant HP in a £7.1bn purchase the Americans are now deeply regretting.
Despite that debacle, experts believe overseas buyers have not had their appetite spoiled for UK bids. So how many might be snapped up before the fireworks go off to celebrate the start of 2014?
‘Pretty much every single one,’ muses one long- serving City analyst, only partly in jest.
Of the four British software or IT companies that 18 months ago were worth more than £1bn, only one now remains autonomous: Sage.
The group, which makes accounting software for small and mediumsized businesses, is based in Newcastle upon Tyne.
It is a major employer in the area, and one of the few listed companies based in the region after the demise of Northern Rock.
Rumours perpetually swirl over the group’s future, with private equity always said to be 18 months away from making a killer offer.
But some analysts say the company’s margins are now as thin as they can be. It is also unique in the British technology world, because its customer base is thousands of small businesses rather than a handful of larger clients.
Imagination Technologies, which designs the brains that go in computer chips, also stretches the sale of its products across a large number of companies.
But it does have an extremely large exposure to Apple, its biggest customer. Observers suggest this makes it vulnerable to a potential takeover by the Silicon Valley giant.
That would fit within Apple’s avowed aim to take more control of its products.
Imagination’s shares are notoriously volatile, even by technology standards, so Apple could take the opportunity of a dampened price to swoop in. Imagination’s main rival ARM – though much bigger with a market cap of £11bn to Imagination’s £ 1.1bn – is not necessarily immune to the firepower of American giants.
Someone with significant size and muscle could, analysts suggest quietly, one day make an offer for the group.
ARM’s strength lies in its processing brains, while Imagination’s forte is in its graphics intelligence.
Loss-making Wolfson Microelectronics, which was previously stung by Apple withdrawing its contracts in 2011, is another UK group that could make a tempting morsel for an overseas purchaser.
The group makes audio chips which improve voicecall quality and audio playback for music and video, while minimising power consumption.
Its association with Samsung was one of its saving graces in the wake of Apple’s decision to pull the plug.
It was rewarded when its technology was chosen to be included in the Galaxy S3 phone, which has gone on to outsell its Apple rival.
This close bond – which sees Wolfson doing around 40pc of its business with Samsung – could also result in the group being folded into the South Korean giant’s embrace. Another smaller firm, IQE, specialises in Gallium Arsenide – the ultra-efficient chip material that is tipped to be the new silicon.
As demand for ever-faster components grows, so more manufacturers will turn to the material to enhance performance, analysts say.
IQE has also struck a deal to sell to solar manufacturers but its main prospects remain with chip makers.
This makes a takeover highly attractive, analysts say, with processing giant Intel the most likely buyer.
Valued at just £176m, IQE would not leave much of a dent in Intel’s finances.
Micro Focus, the software maker, saw off a bid from private equity pair Bain Capital and Advent International last summer, but the group is not out of the woods yet.
With its flagship technology used in Microsoft’s Windows 8 system, the group could soon see itself become part of the wider Bill Gates’ stable, according to analysts. Another buyer could be German- based software giant SAP.
If offers don’t materialise from either of those two, then there’s always Bain waiting in the wings once its six- month cooling- off period comes to an end.
The vast wealth of technology expertise in the UK means that there will always be small companies and start-ups emerging.
Last year saw IT group Wandisco come to market, floating at 180p before ballooning to 444p, in a sign that UK technology companies can still muster astronomic growth rates under their own steam.
Its boss David Richards is a passionate defender of ‘technology invented in a garage’, who insists ‘there is no reason we can’t create the next Google or Facebook in the UK’.
But that will only happen if Britain can resist the lure of the takeover dollar and nurtures its own technology giants over the long term.